Be Wary of Promoting Top Sales Reps

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For those who thought the Peter Principle was an old wives’ tale, three university professors want to set them straight.

A new working paper for the National Bureau of Economic Research finds evidence consistent with the Peter Principle, which holds that companies prioritize current job performance in promotion decisions at the expense of characteristics more relevant to the open position. In its most extreme construction, the principle states that competent workers will be promoted until they become incompetent managers.

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In particular, the research shows that while high-performing salespeople are more likely than others to be promoted, sales performance negatively predicts managerial performance.

That creates a conundrum for employers, according to the researchers — Alan Benson of the University of Minnesota, Danielle Li of the Massachusetts Institute of Technology, and Kelly Shue of Yale University.

“If firms promote workers based on current performance, they may end up with worse managers,” the paper states. “Yet if firms promote workers based on traits that predict managerial potential, they may pass over higher-performing workers, thereby weakening incentives for workers to perform well in their current roles.”

The latter promotion policies could also lead to perceptions of favoritism or unfairness, according to the paper.

The research results “suggest either that firms make mistakes in their promotion decisions, or that the incentive benefits of promoting based on sales performance justify the costs of promoting workers with lower managerial potential,” the professors write.

The professors find no evidence for the former possibility. However, evidence for the latter possibility is presented by showing that firms appear to actively manage the trade-off between providing incentives and promoting the best potential managers. That is, they place less emphasis on sales performance in promotions where managerial roles entail greater responsibility and where sales performance is also rewarded by relatively strong pay for performance.

The researchers’ analysis relies on transaction-level data provided by a vendor of sales performance management software. The data includes standardized measures of sales transactions and organizational hierarchy for a panel of 53,035 workers — 1,531 of whom were promoted into managerial positions from 2005 through 2011 — at 214 U.S.-based companies.

The paper looks at sales workers’ employment history and data on sales credits to examine promotion as a function of sales performance. For those promoted to management positions, it evaluates “manager value added,” a measure of how sales managers impact subordinates’ performance.

The professors find that a doubling of sales credits increases the probability that a salesperson will be promoted by 14.3% relative to the base probability of promotion.

However, doubling a new manager’s pre-promotion sales corresponds to a 7.5% decline in subordinates’ sales performance. “Given that a typical manager is in charge of five subordinates, our results also imply that a doubling of a manager’s pre-promotion sales predicts that total team sales under the new manager will decline by more than one-third of one worker,” the professors write.

The reverse is also true: relatively poor prior sales performance among newly promoted managers is associated with significant improvements in subordinates’ performance.

The reason for that seemingly bizarre tendency has actually been documented in prior research, according to the paper. The explanation: “If firms’ promotion policies ‘discriminate’ against poor sales performers, then poor sales performers who are nevertheless promoted should be better managers.”

The professors also cite a 2016 Forbes article arguing that great sales workers are motivated by a desire for personal achievement rather than team achievement.

Another finding of the research supports that contention. The professors found that a doubling in “collaboration” — the number of colleagues with whom a sales worker shared credit on transactions — predicts a 15.8% improvement in manager value added.

The paper cautions against interpreting the research results as evidence that companies have mistaken beliefs or behave inefficiently.

Rather, “firms may heavily weight current job performance in promotion decisions to encourage workers to exert effort in their current job roles and to maintain norms of fairness,” the researchers state.

“In addition,” they continue, “the availability of relatively clear measures of worker productivity … may lead organizations to emphasize these characteristics, rather than other, more subjective or fungible employee characteristics, in promotion decisions.”